Speech to the Seminar on Climate Change, Innovation and Growth

I am very pleased to be here today to address one of the greatest challenges facing mankind. The scientific data about climate change is no longer in doubt, and it leads us to the inescapable conclusion that we have run out of time.

The outlook is alarming

In its most recent World Energy Outlook, our sister organisation, the IEA, warned that without new policies, carbon dioxide emissions would grow from 26 billion tonnes a year in 2004 to 40 in 2030. Emissions could rise to as much as 58 billion tonnes a year by 2050. That is almost 140% above current levels. The report concludes that “the outlook is worse than we had previously thought.”

The Intergovernmental Panel on Climate Change warns that failure to act will lead to the risk of shortages of water and extensive drought, rising sea levels and storm surges that will threaten coastal areas, lower yields from agriculture in already vulnerable regions, changes in yields in forests and fisheries, the loss of many animal and plant species, more intense and damaging storms, and increased health risks in many regions.

Poorer countries are likely to suffer disproportionately, but all countries will be affected. A country like Portugal is already at risk from extreme weather events such as drought, heat waves and forest fires. Thus, you have all the more interest in taking action to mitigate the effects of climate change.

Collective action is needed

The consequences of failure to take action are evident. It is no exaggeration to say that climate change poses serious challenges, not just for the environment, but for peace and security in the 21st century. The global community must work together to address this threat to our planet.

At the OECD and the IEA, we are working with our member countries and with key new players in the world economy – in particular China, India, Brazil and Russia - to identify specific policies and mechanisms that can help us in our response to climate change. This is no easy task. Cutting emissions and beginning to stabilise the presence of greenhouse gases in the atmosphere will require major adjustments not only in the mix of energy we use and the technologies we use to produce this energy, but in buildings and transportation systems, product design, land use, and the way we price basic commodities such as water and energy.

So we face hard choices. Our challenge, collectively, is to change the way we invest and behave, at the individual, the company, and the national level, to reduce greenhouse gas emissions while minimising the impact on economies and society.

Portugal has signed and ratified the Kyoto Protocol. Under the EU Burden Sharing Agreement, Portugal has committed to limit its greenhouse gas emissions growth to 27% above its 1990 levels by 2008-2012. In fact, total GHG emissions already rose 41% between 1990-2004. The good news is that the rate of growth in emissions has started to decline since 2000, in part thanks to the diversification of your energy supply. Unfortunately, we cannot say the same regarding most of the other parties to the Protocol.

Both the OECD and the IEA are supporting its members in the negotiations on the next steps under the UN Climate Change Convention. Tighter fuel efficiency standards for vehicles; tighter energy efficiency standards for a wide range of electrical appliances; stricter building codes and the mandatory adoption of efficient lighting systems: all of these should be considered in international co-operation on the use of regulation and information-based policies to address climate change.

The OECD recommends market-based solutions

The OECD’s contribution to addressing climate change lies in its capacity for forward-looking policy analysis, its ability to identify and promote best practices and provide recommendations for market-based solutions. Our studies show that environmentally-related taxes are an efficient policy instrument. A tax on emissions allows those companies that can curb them at the lowest cost to do so first, while allowing companies with higher costs to pay the tax while they take the time to implement technological adjustments.

Carbon taxes and emissions trading will ensure that energy-saving efforts are concentrated in areas where their impact is the highest. When these types of market-based instruments are used, exemptions should be avoided, as they undermine their effectiveness.

The global carbon price must be set at a level high enough to help shift investment and economic activity away from carbon-intensive production and consumption and create incentives for the development and use of new, clean energy technologies and new forms of energy efficiency. Increased international co-operation clearly becomes necessary in the use of regulations to address climate change.

Competitiveness can remain intact and the cost of action can be manageable

Inevitably, this raises issues of competitiveness for energy-intensive industries that compete in global and domestic markets. Diminished competitiveness is not inevitable and any impacts can be mitigated without reducing the effectiveness of the policy measures. Clearly, the more widely such taxes are applied across countries, the better the level playing field for business.

The best response is to provide incentives for companies to move to cleaner technologies, while simultaneously taking transitional measures to help affected individuals or sectors. Ambitious policies to tackle climate change could lead to a shift in the structure of the economy – away from carbon-intensive activities and toward low-carbon ones.

Furthermore, we should not exaggerate the cost of change. Action is affordable. At the OECD, we estimate that ambitious moves to deal with climate change would reduce GDP about 1 per cent by 2030, providing that efficient policies are adopted.

The cost of not acting would be much higher. The Stern report, for example, estimates that the world economy could be 5-20 per cent smaller in 2050 if we fail to act in a timely and ambitious way now.

Innovation is the key to improving the outlook

As part of its detailed action plan for a low-carbon world, to be concluded in time for the G8 leaders’ summit in Japan next year, the IEA last year published an important study, “Energy Technology Perspectives: Scenarios and Strategies to 2050”. It showed how advances in energy technologies and improved energy efficiency can achieve major reductions in greenhouse gas emissions by 2050. The report focused on key technologies in electric power generation, transport, building and appliances, and industry. The conclusion is that innovation, combined with the right incentives, will be key in improving the outlook.

Assuming development across all technologies, emissions in 2050 could be just 6 per cent higher than today. And under what the IEA called its TECH Plus scenario, which assumed a higher rate of progress in some key technologies such as hydrogen and fuel cells, emissions in 2050 could actually be 16 per cent lower than today.

All countries, both small and large, have a role to play. Small countries have the advantage that they can be more experimental if there is wide public support for an issue – such as responding to climate change. Denmark, for example, is a leader in wind power turbines and in combustion technologies. Sweden has shown the possibilities of converting biomass and garbage to liquid fuels.

Portugal also has a large potential for renewable energy generation. Your investments in electricity generation from wind are bearing fruit: in 2005, Portugal was ranked fifth worldwide in terms of new installed wind power capacity. Furthermore, by some estimates, new technologies in offshore deepwater wind power would allow Portugal to add up to 12.7 gigawatts of clean electricity generation capacity by 2020. Reducing dependence on hydropower production, which currently accounts for approximately 87% of total renewable energy sources (RES) output, could further expand your potential for renewable energy generation.

Portugal can also be congratulated for some of the steps it is taking to adopt clean energy and to promote energy efficiency in buildings and transportation.

I was interested to learn that in Porto there is a fleet of 225 natural gas-fuelled public transportation vehicles, the second largest such fleet in the EU-15. I was also interested to learn that Portugal is testing out three hydrogen fuel cell buses and is pressing taxi cab operators to convert to hybrid automobiles. Early experience with such technological innovations in the transportation sector should provide interesting lessons for the future.

Opportunities for growth abound in a low-carbon economy

In making the transition to a low-carbon economy, there are exciting opportunities for economic growth. Where there is great need, there is also great opportunity. Portuguese businesses that succeed in positioning themselves in the renewable energy market will have a potential for high growth internationally. Green technologies offer the possibility for new jobs and industries for those businesses and countries that are fastest to respond to these new developments.

Obviously, for these technologies to advance, several conditions will have to be met. Governments will have to create the regulatory and market mechanisms needed to assure investors and researchers that there will be a market for new technologies. Governments will also have to share the risk of new technologies with the private sector by investing in research and development and in demonstration and deployment projects. Cross-border collaboration, in both the public and the private sectors, will be essential. A key goal will be to engage emerging economies like China and India in low-carbon technologies.

Conclusion

A new consensus is emerging regarding the urgency to take action. At the OECD we will play our role by providing a platform for global dialogue on policy solutions. In 2008 we will present our 5-yearly environmental outlook at a Ministerial meeting that will define the course of action for our member countries.

The need for leadership and shared commitment at the global level has never been greater. But I am optimistic about the prospect of effectively addressing this challenge as each one of us assumes his own responsibilities for the benefit of future generations, so that they can continue to enjoy our beautiful planet.